Warranties
Contractual statements by the seller about the business, breach of which may entitle the buyer to damages.
Full Definition
Warranties are contractual statements made by the seller about the target company and its business. If a warranty is untrue, the buyer may be entitled to claim damages for breach of contract.
Common warranty categories:
- Corporate: Constitution, shares, subsidiaries
- Accounts: Accuracy, compliance with standards
- Assets: Ownership, condition, encumbrances
- Contracts: Material contracts, compliance
- Employees: Terms, disputes, pensions
- IP: Ownership, licences, infringement
- Property: Title, leases, planning
- Tax: Compliance, returns, liabilities
- Litigation: Disputes, claims
- Compliance: Laws, regulations, permits
Warranty vs indemnity: Warranties: Statement of fact, damages-based claim, mitigation required Indemnities: Promise to compensate, pound-for-pound, specific risks
Limitation mechanisms:
- Time limits: 2-7 years depending on warranty type
- Financial caps: Often percentage of purchase price
- De minimis: Minimum claim threshold
- Basket/threshold: Aggregate before claims
- Disclosure: Matters disclosed don't give rise to claims
UK practice: Warranty negotiation is central to UK SPA negotiations. Buyers seek broad warranties while sellers seek to limit exposure through carve-outs, caps, and disclosure.
Related Terms
Indemnities
Contractual promises to compensate the buyer pound-for-pound for specific identified losses or liabilities.
Disclosure Letter
A letter from the seller disclosing matters that qualify the warranties given in the sale agreement.
Share Purchase Agreement (SPA)
The definitive legal contract governing the sale and purchase of shares in a company.
Warranty & Indemnity Insurance
Insurance covering losses arising from breach of warranties or claims under indemnities in M&A transactions.